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Comparing: QS & SS Quota ShareSurplus Share A fixed percentage amount is retained by the insurer and ceded to the reinsurer A fixed dollar amount of retention is selected by the insurer resulting in variable percentages of retention and cession All policies included in the agreement are reinsured according to the specified percentages Policies with limits less than the retention are retained 100% by the reinsured company Used in property and casualty classes of insurance Used most frequently in property insurance

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“Excess of Loss” Non-Proportional Reinsurance Indemnification Concept Remember- reinsurance “attachment” may apply on one of many bases $1M Limits of insurance Attachment Point Reinsurance reimbursement for the amount of loss in “excess of” the retention Primary Reinsurance Amount Reinsurance indemnifies for a loss in excess of the primary retention

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Example: Excess of Loss (XOL) Dr. A, an orthopedic surgeon, failed to properly treat a fracture of the left femur. The patient was a high school athlete and suffered permanent injury to his leg. Dr. A had a $1,000,000 policy limit (claims-made) at the time of the medical incident and the insurer was able to settle the case for $1,000,000. The insurer had an Excess of Loss Reinsurance agreement in place for $750,000 “excess of” $250,000 per claim. Reinsurer pays (indemnifies) $750,000 of the settlement “in excess of” $1,000,000 Policy Limit $250,000 Retained by the insurer

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Example: Clash Coverage Dr. A was involved in another case with two of his associates that was settled for a total of $3,000,000, with fault apportioned equally among the three doctors ($1M each). Each doctor was covered under a $1,000,000 policy limit at the time of the medical incident. The insurer had in place a Per Occurrence Clash reinsurance agreement for $5,000,000 “excess of” $500,000 per medical incident. LimitsDr. ADr. BDr. CTotal Recovery Loss$1,000,000 Reinsurance Limit $5,000,000 “in excess of” Paid loss: $833,333 Paid loss: $833,333 Paid loss: $833,333 $2,500,000 Retention$500,000 Retained by Insurer

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State Regulation Advantages of State Regulation – Greater responsiveness to local needs – Uniformity of laws by the NAIC – Greater opportunity for innovation – Unknown consequences of federal regulation – Decentralization of political power

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Financial Regulation Minimum capital and surplus requirements Admitted assets- those that state law allows an insurer to who on its statutory balance sheet in determining its financial condition Reserves- liabilities (state prescribes methods for calculating) Surplus- difference between assets & liabilities (determines amount of business allowed)

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Rate Regulation I All states (except Illinois) have laws requiring rates to be adequate, reasonable (not excessive), not unfairly discriminatory Types of rating laws (Property/Casualty): – State-made rates- state determines and all insurers in state must use (Texas and Massachusetts for auto rates) – Mandatory bureau rates- rating bureau determines and all insurers must use some deviations (North Carolina)

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Rate Regulation II Types of rating laws: – Prior approval- rates must be filed and approved by the state insurance department before they can be used (majority use, but problem of delays) – File-and-use- companies are required only to file the rates with state officials (who may later disapprove) & and use immediately – Open competition- no filing laws though may have to furnish schedules and supporting data to state officials – Flex rating laws- prior approval only required if rate change exceeds a predetermined range—e.g., 5%